INFORMAL FINANCIAL ARRANGEMENTS AND THE STABILITY OF DEPOSIT INSURANCE IN LESS-DEVELOPED-COUNTRIES

Describes a model which develops conditions under which formal financial intermediaries do not operate in less diverisified areas, which gives rise to many informal financial arrangements that make loan payoffs contingent on project outcomes. The paper discusses rotating credit clubs, because they mobilize deposits as well as make loans and have rules that overcome many of the drawbacks faced by banking institutions. The arguments for and against deposit insurance are discussed. The question of whether government should have a role in the provision of deposit insurance is addressed. One type of financial arrangement found in informal markets is decribed and compared to financial contracts found at standard banking institutions. A model of financial intermediation with overlapping generations is then developed. -from Authors